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The Black Sea Trade and Development
BankThe Forgotten
Neighborhood: An Overview of Economic And Regional Trends Around the Black
SeaFifth International Black Sea Symposium The Black Sea Region as an Influential
Crossroad Between East and West: A Path Towards ExtroversionAthens, 4 July 2012
Outline of Presentation
Overview of Economic Situation in the Black Sea Region
Outlook for Region & Key Challenges
Black Sea Regionalism and the EU
2
2000-08: High growth; 2009: Negative; 2010 &11:
Recovery; 2012: ?
3
Regional Trends: 2000-08 Before Economic
CrisisHigh growth despite diversity of
economies- all countries experience positive growth 2002-08
Between 2000-08 annual real GDP growth averages 5.9%
Living standards/ per capita income rise, poverty rates decline sharply
Private capital flows increase- esp. FDI over 4% GDP 2006-08
Intra-Regional trade, investment, financing, also increase 4
Financial Crisis 2008-09
9/08- Global markets freeze, financing disappears
Govts, banks, firms dependent on external financing face liquidity ‘crunch’
Regional financial systems face loss of confidence- Governments support successfully at high cost
Financial systems relatively small - therefore damage less than elsewhere in E. Europe.
For most part in Black Sea Region financial crisis limited- Ukraine an exception
Black Sea Region mainly suffered a short but sharp Economic crisis
5
Economic Crisis in Black Sea
Credit to businesses & consumers disappeared reducing liquidity & demand, slowing investment
International trade flows dropped, exports down, contraction in key W. European markets
Problems exacerbated by declines in (i) commodity prices, (ii) remittances, (iii) sundry external receipts
Reversal of fortune- poverty/ unemployment/ fiscal deficits up; current account deficits/ trade flows/ inflation down
Painful adjustment process only course for most
6
Why was Black Sea (& C/E Europe) Highly
Vulnerable?Pro-cyclical fiscal policy- deficits maintained
during rapid economic growth added an unnecessary stimulus which (i) overheated the economy and (ii) made it difficult to counteract the downturn with increased public spending and/or tax cuts,
Large current account deficits Private sector foreign financed domestic
demandLack of a domestic capital base and/or of
domestic champions able to compete internationally General dependence on/ vulnerability to
continued flow of external financing7
‘Silver linings’ to the crisis
Aside from Greece, not a debt crisis. In most countries debt levels low &debt servicing comfortable
Nasty recession but speedy recoveryGovernments responded promptly and
substantively to support banking systemsVienna Initiative to refinance/ recap banksIMF programs in many countries: Armenia,
Greece, Georgia, Moldova, Romania, Serbia, Ukraine- some ongoing, some stalled, some replaced by new
FDI slow to recover, but still at 2.0-2.5% of GDP 8
BSEC Region in 2009- a very difficult year
9
GDP
Growth InflationCur Acc Bal
/ GDPBudget/
GDPPublic
Debt/GDPAlbania 3.3% 2.3% -15.2% -7.0% 59.8%Armenia -14.2% 3.4% -15.8% -7.5% 40.6%Azerbaijan 9.3% 1.5% 23.0% 6.6% 12.1%Bulgaria -5.5% 2.8% -8.8% -0.9% 15.6%Georgia -3.8% 1.7% -11.6% -7.7% 37.0%Greece -3.3% 1.2% -11.2% -15.6% 129.5%Moldova -6.0% 0.0% -9.8% -6.4% 32.4%Romania -7.1% 5.6% -4.2% -7.3% 23.9%Russia -7.8% 11.7% 4.0% -6.3% 8.3%Serbia -3.5% 8.4% -7.1% -4.8% 38.2%Turkey -4.8% 6.3% -2.2% -5.5% 46.4%Ukraine -14.8% 15.9% -1.5% -3.8% 34.8%
BSEC Region in 2010- Recovery
10
GDP
Growth InflationCur Acc Bal
/ GDPBudget/
GDPPublic
Debt/GDPAlbania 3.9% 3.6% -11.7% -3.1% 58.2%Armenia 2.1% 8.2% -14.7% -4.9% 44.0%Azerbaijan 5.0% 5.7% 28.4% 14.0% 11.4%Bulgaria 0.4% 2.4% -1.5% -4.0% 17.4%Georgia 6.3% 7.1% -11.4% -6.6% 42.0%Greece -3.5% 4.7% -10.3% -10.5% 144.8%Moldova 7.1% 7.4% -9.8% -2.5% 30.2%Romania -1.3% 6.1% -4.4% -6.4% 31.7%Russia 4.3% 6.9% 4.8% -3.5% 9.4%Serbia 1.0% 6.5% -7.7% -4.8% 44.9%Turkey 9.2% 8.6% -6.4% -3.6% 43.0%Ukraine 4.1% 9.4% -2.2% -5.9% 39.6%
BSEC Region in 2011-‘New Normal’?
11
GDP
Growth InflationCur Acc Bal
/ GDPBudget/
GDPPublic
Debt/GDPAlbania 1.6% 3.5% -12.2% -3.4% 59.4%Armenia 4.6% 7.7% -10.9% -2.9% 49.0%Azerbaijan 0.1% 7.9% 27.0% 13.3% 12.0%Bulgaria 1.7% 4.2% 0.9% -2.0% 17.5%Georgia 7.0% 8.5% -12.5% -3.2% 43.6%Greece -6.9% 3.3% -9.8% -9.2% 162.5%Moldova 6.4% 7.6% -12.6% -2.4% 29.6%Romania 2.5% 5.8% -4.5% -4.1% 34.5%Russia 4.3% 8.4% 5.3% 1.6% 8.2%Serbia 1.6% 11.0% -9.7% -5.1% 44.1%Turkey 8.5% 6.5% -10.0% -1.3% 42.6%Ukraine 5.2% 8.0% -5.5% -1.4% 38.0%
The Black Sea Region in 2010-11
Most countries recover and post real growthCredit flow restarts, unsteadily & at higher
costConsumption recovers more quickly than
investment (domestic and FDI)Export recovery- roughly to 2006-07 levelsTurkey and Russia emerge as key drivers of
growthEU members relative laggards- Greece an
outlierUnemployment still highInflation comes and goesFiscal deficits declining
12
Fiscal Balances- Slow Recovery from Downturn
Deterioration
Sources: National Statistical Agencies, IMF-IFS & EIU
13
FDI in the Black Sea Region Since 2000
Sources: National Statistical Agencies, IMF-IFS & EIU
14
Outlook for Black Sea Region
Contraction over for all except Greece; positive growth to continue in 2012.
Appear to be on new ‘track’: 3-4% annual real GDP Growth. Less than previous 6% but re-starts convergence to W. Europe levels.
High investment needs in infrastructure over next decade- looming bottleneck in many countries
Investment slow to return so far, & need to improve business environment, but relocation of EU production capacity to Region likely to continue
15
Long Term Regional Prospects Mostly Positive
Proximity to wealthy markets of W. EuropeQuality of business environment favorable
& improvingHigh quality of human capital at relatively
low costExperience, flexibility & resilience in
dealing with crises & taking difficult measures
Financial sectors small. thus, less damage to economy, and have room for ‘organic’ growth
16
Key RisksExogenous shocks (commodity, finance,
geopolitics, etc.)Governance & rule of law issuesInfrastructure quality poor; looms as
bottleneck to continued growthUncertain EU-Black Sea relations, esp. with
RussiaRisk of contagion from Eurozone crisis
High external financing needs make Region vulnerable to market upheavals & liquidity ‘crunches’
Dependence on W. Europe for absorption of exportsPotential for the Euro crisis to spread to the
Region’s banking sectors- Is foreign ownership a source of stability or instability? 1
7
Capital Flows to Emerging Europe- Some Recovery,
Much Uncertainty
Source: International Institute of Finance
18
Key Regional Challenges for Future
Sustaining Economic Growth- (i) maintaining stability, (ii) increasing productivity, (iii) reduce poverty & achieve convergence
Evolution of Political Economy Relations with EU- more complicated than ever
Managing Uncertainty & Reducing VulnerabilityAlso:Long Term Demographic trends: (i) need to adapt
structurally, (ii) workforce implications, (iii) fiscal pressures
Environmental issues: (i) impact on quality of life, (ii) the implications of global accords on local economic activity 1
9
Managing Uncertainty & Reducing Vulnerability
Easier diagnosed than curedArray of economic risks beyond access to
finance: geopolitics, food security, commodity prices & availability (inc. energy), environmental questions, etc.
Even though Russia & Turkey are in G20, Region is a ‘taker’ in policy terms, not a ‘maker’
Nascent but dangerous trend to protectionism & isolationism- food export bans, gas flow cuts capital restrictions, exchange rate manipulation 2
0
Can Regional Cooperation Mitigate Risks & Offer
Outlet?No panacea, but room for growth in
investment, trade & financing: Many ‘Win – Win’ possibilities exist
Potential gains are higher for small/ medium countries that need openness to grow
Can expand market reach of banks & firms Official cooperation usually leads (e.g. EU
accession activities) but real take-off from private linkages
Benefits for competitiveness & sustainability- ‘local’ and more firmly established, less contagion sensitive
21
Can Regional Cooperation Mitigate Risks?
Prospects not favorableLack of political commitment- there are
forums for dialogue and information sharing, but limited prospects for policy harmonization, resource pooling, or common institutions
Economic difficulties an obstacleIntensifying bilateral rivalriesEU influence- (i) Diverts country focus
to west, (ii) Rules & restrictions hurt Black Sea cooperation prospects 2
2
Regional Trade: Setback in 2009, Partial Recovery
in 2010
Sources: National Statistical Agencies23
Regional Relations with EU- Why Important?
Most important external economic actor, directly & indirectly, high externality impact
Main market for trade, investment, financeKey exporter of rules, regulations,
standardsSteady expansion of engagement with
Black Sea up to 2009, politically and economically.
Negative impact on Regional Cooperation despite BSS & EaP. Mainly engages countries Bilaterally
24
EU & Black Sea in the Crisis
In Crisis, little direct aid to- or cooperation with- Black Sea. No Eurobonds, Financial Stability Fund, Institutional Mechanisms, etc……
However, HUGE indirect involvement: (i) IMF funding, (ii) ECB operations through Eurozone based banks, (iii) Operations of EIB, etc. WHY?Quicker delivery mechanisms of proxiesFear of setting precedents by direct
engagement?Lack of internal consensus on what to
do? 25
EU & Black Sea Post-Crisis
The Eurozone crisis- esp. the Greek question- consumes most EU attention
EU unwilling/ unable to consider new initiatives
Internal EU discord, esp. over Russia & Turkey
Existing initiatives confused and undermine each other: BS Synergy vs. E. Partnership
IFIs (EIB & EBRD) very active, but EC resources uncertain, cannot just ‘throw money’
Eurozone expansion (Bul/Rom) & EU expansion (Tur/ Srb/ Alb/ ‘ENPs’?) Uncertain
Impact of ‘Arab Spring’? 26
EU & Black Sea Future Uncertain
Critical importance of EU-Russia relations Much uncertainty as to future. No clear EU
policy, Black Sea states wish closer engagement
Lack of EU Perspective & EU 27 ‘growing pains’ hurt image & attractiveness of EU
Compounded by view that crisis imported from West + perception of EU ‘disappearance’
Popularity of € waxed in 08-09/ wanes with Euro-zone crisis. In Black Sea € predominant in west & Turkey (EU ‘Ins’), US$ in east (EU ‘outs’). 2
7
What the EU Can Do
EU membership perspective is the most effective cooperation enhancing policy
In its absence, EU’s IPA programs a useful model for considering cooperation initiatives in Black Sea (and elsewhere).
EU can do much better job supporting locally developed cooperation initiatives such as BSEC
EU can also do better job of not undermining itself- BS Synergy vs. EaP 2
8